Australian Market Snapshot | Q1 2019
Take a look at our latest snapshot of the Australian leasing market, as well as some key real estate market trends driving outcomes.
While Sydney residential real estate rents are falling and vacancy rates rising, we’re seeing the opposite in Sydney’s commercial real estate market.
Gross rental rates in the Sydney CBD are by far the most expensive in Australia, averaging $1,280/m2 for A-Grade premises. Net rent rates (after incentives) have increased by 9% over the past twelve months.
These increased rental rates have been driven by low vacancy rates of about 4.1%, which is well below the national CBD average of 9.2%. The incentive levels on offer in this high-demand Sydney CBD environment are also comparatively low at about 18%.
Supply is expected to remain tight in 2019, with no major new developments scheduled to be completed in the CBD until 2020 and beyond.
Vacancy rates in other key Sydney markets (North Sydney, Parramatta and Macquarie Park) have also dropped over the past year, helping to drive rental rates higher. Gross rental rates for A-Grade premises are, of course, cheaper in these areas than in the CBD. Expect to pay the following (on average):
- North Sydney $975/m2
- Parramatta $675/m2
- Macquarie Park $485/m2
Macquarie Park continues to be affected by the Epping to Chatswood train line closure, which has temporarily stagnated rental rates. The line isn’t expected to reopen again until mid-2019. Moving to fringe from CBD because of lack of vacancy.
- The Sydney market has peaked – Rents have reached such a high point in the Sydney CBD that more and more tenants are choosing to stay put in their existing premises, opting to optimise or sublet part of their space instead of relocating.
- Incentives on the increase – Due to more tenant staying put, the overall leasing activity has flattened. This is placing more pressure on landlords to increase incentives to attract high-quality tenants.
- Barangaroo now fully leased – The new commercial towers in sought-after Barangaroo are now fully leased. So tenants in this region looking for more space will need to search elsewhere.
Melbourne has the second-highest gross rental rates for A-Grade CBD premises in the country, averaging $730/m2. Vacancy rates are at a decade-low 3.2%. Nevertheless, incentive levels are around 26%.
Vacancy rates are also very low (sitting at around 3.1%) in the East Melbourne market.
New injections of stock are expected to help with supply levels over the next three years in the CBD and Docklands areas, adding around 490,000 square metres into Melbourne’s CBD office market.
Due to the overall low vacancy rates, rents in the fringe area St Kilda have been increasing over the past year. Currently, gross rental rates for A-Grade buildings are at $570/m2. Vacancy rates are currently not as low as in the CBD (sitting at around 5%), however, they are expected to tighten as more buildings are withdrawn from the market for residential conversion.
There are also no large building projects due to be completed over the next two years, which will put more pressure on existing stock.
- Melbourne fast-becoming the most popular office destination in Australia – Thanks to cheaper rents and stronger supply levels, more and more companies looking to enter the Australian market or open a HQs are turning their attention to Melbourne. What’s more, Melbourne’s extensive tram and train network means that Melbourne’s CBD and city fringe suburbs are well connected and easily accessible.
- Residential development in St. Kilda – Over the past decade, primarily due to residential conversions, the St Kilda’s commercial office market has decreased by about 100,000 sqm. This downward trend will continue with the Linfox commercial headquarters at 493 St Kilda Road being replaced with apartments, displacing more tenants.
Gross rental rates for Brisbane CBD A-Grade office space are hovering at around $695/m2. on average.
Unlike the Sydney and Melbourne CBD market, the vacancy rates in the Brisbane CBD are relatively high at 14.6%. Incentive levels on offer are also high accordingly (averaging 36%), which gives commercial tenants the upper hand at the negotiation table.
No significant new supply is on the horizon in Brisbane until the end of 2019, potentially putting pressure on the current tenant’s market. Many are taking advantage of the good market conditions now, relocating to better premises or renegotiating the terms of their existing leases in anticipation of a possible market shift.
- Technology companies and startups have eyes on Brisbane – Though Sydney CBD remains the darling of technology companies and startups, Brisbane and the Gold Coast are also proving popular due to reduced rental rates and a good climate for business.
- Tenants making a move – Optimal market conditions are providing tenants with the opportunity to move to more premium buildings. Moving forward, owners of B-Grade buildings will have no choice but to refurbish or reposition to remain competitive.
Average rates for A-Grade CBD office space in Perth are slightly more expensive than Brisbane at about $725/m2, but the vacancy rate is even higher at just under 19%. That’s more than double the national average.
Average incentive levels are currently nearly 50%. That’s by far the highest level available in the Australian market, so savvy tenants in Perth should be able to negotiate a good deal.
No significant new development projects are in the pipeline to be completed in 2019. However, Brookfield Property Partners has plans to develop $1.1 Billion mixed-use towers at Perth’s Elizabeth Quay development. Due to be completed in 2022-2023, the first (and tallest) of the towers will comprise of approximately 220 luxury apartments, a five-star hotel, 15,000 sqm of commercial office space and some retail. The second, smaller tower is set to offer 35,000 sqm of commercial office space and 2000 sqm of retail.
- WA businesses are expanding and hiring – as confidence slowly returns to the mining sector, four out five WA businesses are expecting stronger returns this year and one-third expected growth in the first quarter. The Chamber of Commerce and Industry WA also stated that an unprecedented number of the State’s businesses are getting ready to expand, hire and increase wages this year.
- Government investment – The Australian Government has announced some major infrastructure investments in WA, including the Perth Congestion Package and Perth METRONET to combat congestion and overcrowding, grow the economy and create jobs. These major investments support a new Perth City Deal and a vision for Perth’s future growth.
The Adelaide CBD has very affordable gross rental rates for A-Grade office space. Average rates are $485/m2. Vacancy rates are 14.7% (comparable with Brisbane). Incentive levels are running at 30%.
Two new development projects will boost supply in the Adelaide CBD by 31,000 sqm by the end of 2019, so it should remain a tenant’s market for the foreseeable future.
As of July 1 2018, stamp duty on commercial transactions was abolished for purchasers of ‘qualifying land’ (including commercial office, retail and industrial space) in South Australia. This monumental tax change has certainly uplifted the market, luring investors over from the eastern coast of Australia and tempting many local companies to buy properties (instead of leasing).
Average gross rent rates for A-Grade office premises in the nation’s capital are $460/m2, making them the cheapest of any of Australia’s major capital cities. Vacancy rates are about 12.5%, and incentive levels are currently running at about 18%.
Canberra Data Centres’ (CDC) data centre in Fyshwick has now been completed, designed to meet the Government’s increased demand for cloud services. And the CDC has also started planning to build more data centre projects in Canberra (and around the nation).
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